When I was growing up, we had it constantly drilled into our heads how awful the 1970s had been because the U.S. was “dependent on foreign oil.” That was the (ostensible) reason for the energy conservation campaigns and government policies to encourage the switch to non-fossil fuels. I remember seeing statistics talking about how the world and/or U.S. (depending on the stat) only had “x years of oil left” at current rates of consumption.

The U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs the nation’s economic recovery, Bank of America Corp. said.

U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.
…
Oil extraction is soaring at shale formations in Texas and North Dakota as companies split rocks using high-pressure liquid, a process known as hydraulic fracturing, or fracking. The surge in supply combined with restrictions on exporting crude is curbing the price of West Texas Intermediate, America’s oil benchmark…

U.S. oil output will surge to 13.1 million barrels a day in 2019 and plateau thereafter, according to the IEA, a Paris-based adviser to 29 nations. The country will lose its top-producer ranking at the start of the 2030s, the agency said in its World Energy Outlook in November.

Here is EIA data on historical U.S. crude output, but be careful this just focuses on “crude” and not the broader category including all liquids:

Back in 1984, if someone had said that in 30 years the U.S. would be the world’s leader in crude production, why that would have been as ridiculous as claiming that the New York Times would talk about the president’s “secret kill list” without causing a revolution.

Also, from the graph, it looks like U.S. crude production in 1984 had only declined slightly from 1970. So, “if someone had said that in 30 years the U.S. would be the world’s leader in crude production”, it wouldn’t have been all that ridiculous. In the late 1990s, maybe.

EH, you’re right perhaps actual industry experts would not have been shocked in 1984 to hear that in 30 years, the U.S. led the world in crude output. But (a) I’m talking about what the general perception was, so my statement is still true though perhaps due to ignorance rather than a turnaround, and (b) I think even experts back then would have been surprised at this result.

I know that 1995 is after 1984, in case that was in doubt. I’m saying, if you had asked people in 1984, “Do you think 30 years from now the US will be in such a position,” I think even many experts in the industry would have doubted it.

But you’re right, the actual situation in 1984 (that experts would have known) differed from what I was taught and most Americans probably believed.

No. There was a panic mentality for sure. It shouldn’t be hard to find predictions from the era.I have been hearing about peak oil and our ‘dependency’ for decades. Experts aside that was the common wisdom for sure.

Your observation is on target regardless of the quibble between mid 80’s versus mid 90’s. It is worth reflecting on what led the “experts” not to see this rebound coming — the price system and technological innovation. Higher prices, what results from demand outstripping supply — and technological innovation — have both played key roles in making the US go from a marginal producer to a core producer. The role of innovation is fascinating, because as it often does, market driven innovation often has little to do with seminal breakthroughs/insights or even invention. The fruits of enhanced oil production are not really the product of breakthroughs in chemical engineering, let alone the science of hydraulics and fluid dynamics. It is far more likely that they are the result of the spreading of information technology and instrumentation into yet another area of manufacturing, one trial and error at a time. Oh, and having a well functioning syetem of fragmented property rights. that allows all decentralized stake holders to get in the game. All very Hayekian.

Sorry Bob but there is a huge difference between proven and probable mineral reserves, which is what we need to see to be confident about economic production and inferred, indicated, or measured mineral resources, which is what you are actually talking about when you keep referencing the EIA estimates.

For the record, I have been searching through 10-Ks for evidence that shale projects are viable and I have yet to find a single primary producer of shale that is self financing and economically profitable. Note that I am not claiming that you can’t have some very good wells that will offer amazing returns for their investors. There are actually hundreds such wells in the core areas of good shale formations and the production history shows that they are wonderful operations for their investors. The trouble comes when companies move out of the core areas, which are tiny, and they must if they are to grow to a large size and make the original investors rich. When we look at the operations and include all wells, the picture changes dramatically.

Now you may ask how this can happen and I suggest that the answer lies in Human Action. The people who run the operations have every incentive to make assumptions that will reduce the depreciation costs, which are huge due to the very steep depletion curves, and shown in the actual production data. That allows the companies to report economic profits and qualify for loans as they drill more and more rapidly depleting wells with borrowed money and the occasional equity infusion. Note that there is very little risk in doing this because the SEC allows the companies to use ESTIMATED ultimate return values as the basis of their depreciation schedules. So what we have are accountants that write off 25%-30% of the cost for a three year old well that has produced half its oil. As long as the drilling can produce more new barrels than are lost to depletion the game can continue but after news of the game leaks out the end will be swift.

Note that this was what the semiconductor players were doing in the 1990s. They might build a foundry that used 350 nm process and write it off over 10 years. But reality would intervene and four years later the introduction of new 180 nm process would make the facility useless. Instead of writing it off the producers would often keep writing off the costs a quarter at a time until a decision was made to do a one-time write-off. And you know how that game ended.

Note that the larger conventional players have written off almost all of their shale investments because they know that they can’t make any money from the process. And note that the state of ND gives us data for the Bakken production that gives us a pretty clear picture if we are willing to look. The last report is for May 2014 and we see a daily production of 974,695 barrels from 7,687 operating wells for a daily production rate of 127 barrels per well. Note that two years before the daily production stood at 578,432 from 4,006 operating wells that produced at a daily rate of 144 barrels per well. That means that the producers spent around $30 billion in new drilling but that the depletion is so quick that the average well production fell by more than 10% for wells that we were told would remain operational for 25-40 years.

The ‘miracle’ is a product of Fed liquidity and loose accounting standards made possible by rule changes put through by the SEC to help the industry a few years ago. There is no miracle because the shale players are at best breaking even. Some time in the next 12-18 months if not sooner the Bakken will peak and the producers will still be in a negative cash flow position. Loans should become much harder to get and production will start to fall rapidly. Once that happens the primary support for the USD will be removed and we may be looking at a very different world. What bothers me is that critics of the Austrian School will point to your speeches and writing and talk about how dumb we were for falling for the same scam that the rest of the profession accepted without question. Sorry Bob but you might want to take Thomas DiLorenzo’s advice and do some work in the field. All you need to do is have your students go through the SEC filings and show you that shale oil and gas are economically viable. If they are careful and read closely you will find that there are no such examples and will discover what I found out a few years back. Shale is a scam that is driven by the Fed’s activities.

Please note that it is easy for anyone to prove me wrong. Go through the data and show me that the operations are profitable and that companies can self finance. And if anyone takes this advice and listens to a conference call I suggest that you pay attention to discussions about funding gaps.

Note that this was what the semiconductor players were doing in the 1990s. They might build a foundry that used 350 nm process and write it off over 10 years. But reality would intervene and four years later the introduction of new 180 nm process would make the facility useless. Instead of writing it off the producers would often keep writing off the costs a quarter at a time until a decision was made to do a one-time write-off. And you know how that game ended.

Yeah, we ended up with a 28 nm process delivering Qualcomm Snapdragon chips that contain quad core ARM at 2GHz plus a couple of DSP cores at 600 MHz and a GPU at 800 MHz, and just about every I/O interface you could think of on the same chip. It all runs on less power than brushing your teeth, and fits on your thumbnail.

… and the game hasn’t quite ended yet.

I think I can be confident in predicting the semiconductor industry will still be doing this for the next few decades, and I doubt there will be any imminent demise of the fossil fuel industry either. Investors may be annoyed by the lack of stability, and rapid depreciation of capital, but that’s just how technology works.

I might also point out that Capitalism is not and has never been “fair” in the technology space. The classic example would be Charles Goodyear and the process of converting natural rubber into useful products. Goodyear spent most of his life working on the problem, died young, never got wealthy out of it, and probably was a drain on his family as well. The rubber products went on to worldwide popularity.

But you are missing the point. In the tech sector progress was being made by new investment and the old capital had to be written down. There is no equivalent in the shale sector. The older wells are the most profitable and productive. The IPs for newer wells is dropping while the depletion rates are rising. The Austrians keep emphasizing the heterogeneity of capital yet we have the shale industry’s use of the factory model, which assumes that the formations are heterogeneous and that the results from the core areas will be similar to those away from them.

Note that we have the production data to show us that this assumption is not true. And note that if the value of assets have to be written down to their true value most of the shale companies would be bankrupt and insolvent as the loans dried up and that the financial institutions had to write down the losses on those loans. The rabbit hole might run very deep my friend but it is not hidden from anyone. CEOs have talked of funding gaps on conference calls and the SEC filings show the growth of debt even for well established companies that should have been throwing off ample returns to investors. Note that the 10-Ks and annual reports make it clear that the accounting uses ‘estimates’ that may not turn out to be accurate. While it is a scam, this is a legal scam and if were on any jury I would have to acquit the people who got rich off of the deception because they didn’t technically lie. And note that the same was true for companies like Nortel. When I looked at their annual report and used the information disclosed I got a value of less than $1 as did a friend who understands the accounting much better than I could. The stock was around C$80 at the time and on its way to C$120 only to crash below the very generous valuation that I had come up with. The shareholders got wiped out but it was their own fault for not reading the filings. The same will happen in the shale space; while the speculative gains could be large the end is clearly known for most investors.

Here in Colorado they are fracking everywhere. My neighborhood is full of new people, with noisy trucks and Harley Davidson motorcycles. Yet I rarely see the oil trucks take oil from the tanks at the well sites.

These new frack wells do not appear to produce much oil yet they sure do change the culture.

It may be that it is early in the cycle. The fact that we can produce shale oil is not in question. The fact that there are some great wells is also not in question. The question is about the productivity of the actual wells that are being drilled shale formations and are they economic as a group. My analysis seems to be saying no but Bob clearly disagrees. The funny thing is that we are both think that we are using an Austrian approach to get to a very different answer. Either one of us is wrong or one of us is using the Austrian method incorrectly. And yes Bob, I know that you know far more about the topic than I ever could. But I suggest that you are being somewhat naive and too trusting of data and people who have a story to tell and motive to tell it a particular way.

A note for all of us who think that people are clever and can come up with a way to deal with our energy problems; it is not being a pessimist to note that a particular effort may lead to a dead end or to suggest that someone might come up with something different. For example, I see no reason why someone cannot come up with an effective way to convert methane hydrates into useful energy at a very large scale. I also do not see why certain areas would not have ample conventional gas reserves. Many of the old exploration programs never bothered looking for gas in some areas because it was stranded and economically worthless. Mexico and many of the OPEC countries could have a great deal of undiscovered gas in reserves. Given the advances made in seismic data processing should make it easy to identify certain potential natural gas targets in oil rich regions. There are many things that we can do but shale may just be a dead end until the technology improves substantially.

Gamble I’ve seen a lot of libertarians make claims like this. What exactly are you saying: Oil companies have been losing money for years during this fracking boom? So in addition to their other alleged transgressions, they’re idiots with their money?

No, I never said oil companies had *other transgressions* , nor did I say oil companies are idiots with *their* money. However there is substantial investment/venture capital at risk. I am sure this constant influx of new money is more likely gambled, rather than soundly invested. Many small oil companies are punching tons of wells. I am not talking about larger more established companies who have long since been profitable. There are so many new kids on the block, it has to make you wonder.

Too get to the bottom of this, somebody just needs to produce numbers explaining how much a frac holes cost. Then you could determine how much oil and how long it will take, to reach break even, then profit.

You can remain a very profitable company while squandering away tons of cash as long as you always have an inflow from somebody else, not necessarily from consumers.

Where I live, there is a new frac hole every other step yet there are few trucks coming to drain the tanks. Maybe it takes several years for the oil to seep up the hole, I really don’t know. There is definitely not a regular pattern of oil trucks draining the tanks.

Anymore, does any company make a profit directly from consumers? Seems more and more revenue come from tax breaks and investment capital rather than the consumer. Heck, sometimes I get the impression you guys think this is the essence and goodness of capitalism.

I think consumers should rule the day.

Too much investment capital always leads to bubbles/mal-investment.
That’s all I am saying.

Dan wrote:
Gamble wrote: “Seems more and more revenue come from tax breaks…”

Revenue never comes from tax breaks. Tax breaks just allow a business to keep their revenue.

As a business owner who takes part in the accounting and taxes, I have learned that tax credits and tax breaks are similar to revenue in so much that they all are entered in the positive column rather than the the negative column. Money in the bank.

No Bob. It isn’t their money. If you look at the 10-Ks, and I don’t know why you are not looking at them you will see see that in one year the top 125 or so oil and gas companies spent around $100 billion more on their capital costs than they got back from sales. Most of that $100 billion was financed in the Junk Bond Market with asset sales and a bit of equity issuance making up the rest.

This is an accounting scam Bob. The producers are legally permitted to use EURs to come up with their depreciation cost schedules even though the actual production data clearly shows that the ultimate recovery rates will be much smaller.

Vangel wrote:Most of that $100 billion was financed in the Junk Bond Market with asset sales and a bit of equity issuance making up the rest. ”

So this sounds like maybe there was a bunch of junk paper that nobody knew how clear of their balance sheets. So they sale a bunch of junk bonds, dig deep holes and then fill them back up with injected water. Speaking of earthquakes, has anybody figured property damage and increased insurance premiums to the frack model?

Unless one believes the “oil is a renewable” school, then ultimately there must come a peak in the oil production if demand continues to rise. Peak oil will occur sometime – it just might not be for quite a while yet.

The US was Saudi Arabia before there was a Saudi Arabia. It has drilled the most number of wells of any country and is the biggest consumer of petroleum products of any country. The trouble is that the American production peaked in 1970 and no amount of capital destruction in the shale sector will ever get the US to produce as many barrels of oil as it did during the peak. Note that even a shallow horizontal well through a typical conventional formation would produce 10,000-20,000 barrels per day, would deplete very slowly, and would be in operation for decades. The modern shale wells are deeper and are down to 150 bpd of production per day after two years.

So this sounds like maybe there was a bunch of junk paper that nobody knew how clear of their balance sheets. So they sale a bunch of junk bonds, dig deep holes and then fill them back up with injected water.

My point was that in his eagerness to embrace human ingenuity as the source of future solutions for our energy problems Dr. Murphy has forgotten about financial and political entrepreneurship that has been enabled by the Fed’s monetary policies. The massive liquidity makes it easy for shale drillers to continue to finance projects that are cash flow negative for years and will never be economic because the depletion rates have made future profits even in a high price environments too small to enable the repayment of debt in a moderate or even high inflation environment. It is clear that the energy return on energy invested is too low for shale production to be viable in all but the tiny core areas in the better formations. The problem is a confusion of indicated resources with proven reserves. And frankly, a smart guy like Bob Murphy should know a lot better.

Speaking of earthquakes, has anybody figured property damage and increased insurance premiums to the frack model?

I don’t think that there are any environmental issues that make fracking particularly unsafe. As long as the drillers follow normal procedures the process should be very safe. As far as the ‘earthquake’ issue, there isn’t any. Small tectonic events do not damage property or cause any problems for animals.

I agree about the earthquakes – if there is an issue it is with water contamination.

Just to be clear Vangel, you predict that the up-tick in production will fairly rapidly return to the downward slope – get back to (or parallel with) the Hubbert curve. The increase will be revealed as a temporary blip encouraged by people with too much money to invest?